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Salary sacrifice cap of £2,000 to be introduced in 2029
The government says 74% of basic rate taxpayers currently using salary sacrifice will be unaffected by the change
The government has confirmed it will introduce a £2,000 per year cap on the amount workers and their bosses can add into pensions via salary sacrifice before being hit with National Insurance (NI).
Employee and employer NICs will be charged in the usual way on the amount above £2,000. Budget documents suggest just 26% of basic rate taxpayers and their employers currently using salary sacrifice will be impacted by the £2,000 cap.
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But the cost of salary sacrifice into pension schemes is forecast to almost treble between 2016/17 and 2030/31, according to the government, rising from £2.8 billion to £8 billion.
Capping NI relief on salary sacrifice to the first £2,000 could reportedly save the Treasury up to £2 billion a year.
It would mean employees wanting to add more into their workplace pensions would see their take home pay lowered.
Jamie Jenkins, director of policy at pensions and investment company Royal London, said the cap could affect employers the most.
“The bigger story may be the effective rise in employer costs, where the savings made on NI were being used for other purposes,” said Jenkins.
However, he added limiting NI relief on salary sacrifice contributions was “perhaps the least worst outcome for pensions”, with the 25% tax-free pension lump sum left untouched.
Rebecca Williams, from wealth and investment manager Rathbones, said the cap risked doing “more harm than good”.
“It would strip away a key incentive for employers to boost pension contributions, undermine efforts to tackle the retirement savings gap, and pile extra costs on businesses already under pressure.”
What else has been announced?
Nestled in the Budget documents put out by the Treasury were some other key pension and retirement-related announcements.
Class 2 voluntary insurance contributions for expats to be abolished
From 6 April 2026 the government will abolish people living abroad from making class 2 voluntary insurance contributions (VNICs) to top up their state pension.
It will also extend the initial residency or contributions requirement to pay VNICs outside of the UK to 10 years, up from three at present.
Budget documents said: “The government is closing loopholes in current voluntary national insurance contributions (VNICs) rules that allow those with a limited connection to the UK to build UK state pension entitlement at a cheaper rate whilst overseas.”
Ministers will also launch a wider review of VNICS, with a call for evidence to be published in 2026.
State pension to rise
Rachel Reeves confirmed the government will increase the state pension for millions of pensioners by 4.8% from next April, under the triple lock system.
The hike means those on a full new state pension will see their weekly payments go up from £230.25 currently to £241.30 from next spring.
The full basic state pension weekly amount will increase from £176.45 per week to £184.91 a week.
State pensioners set for income tax to be protected
Due to the rising state pension and frozen personal allowance (£12,570), those on solely the full new state pension are expected to start paying income tax within two years.
However, Budget documents have revealed that those whose entire income comes via the state pension and goes over the personal allowance will be exempt from “small amounts” of tax from 2027/28.
Further details are not yet available on how this will be implemented but more information will be laid out “next year”.
Defined-benefit pension schemes to pay out surpluses to members
The government will let DB pension schemes pay surplus funds to members from April 2027, should specific scheme rules and trustees allow it.
The government said earlier this year the majority of DB schemes are now running at a surplus, meaning the value of their assets is more than that promised to members.
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